2QFY19 Result Update Institutional Equities PNB Housing Finance 6 November 2018 Reuters: PNBH.NS; Bloomberg: PNBHOUSI IN Relatively Soft Quarter Not Structural In Nature PNB Housing Finance (PNBHF) reported 2QFY19 results with the key pointers being: (1) Disbursements growth slowed to 14% YoY compared with 25% in 1QFY19 (2) NIM contracted 2 bps QoQ to 2.72% due to number of non-structural reasons (3) Asset quality remains bestin-class with a GNPA ratio of 0.45% (4) Opex to ATA metric looked optically poor, rising 15 bps YoY to 0.68% due to non-structural HR costs (See comprehensive conference call takeaways below; see initiating coverage report here). Per se, on the results front, PNBHF posted 6% YoY NII growth at Rs3,832mn, PPOP growth of 24% YoY at Rs4,372mn and PAT growth of 33% YoY at Rs2,530mn. We have revised our estimates for FY19/FY20/FY21 and retained Buy rating on PNBHF, revising our target price to Rs1,272 (from Rs1,312 earlier) and valuing the stock at 2.0x 1HFY21E P/BV. Disbursements growth slowed to 14% YoY compared with 25% in 1QFY19: Disbursements growth slowed due to a variety of reasons but mainly due to the primary market slowing down. This market slowdown little to do with PNBHF s own liquidity and everything to do with issues pertaining to the underlying physical real estate market including. At the same time, it has been a conscious decision of PNBHF to maintain excess liquidity, something they had articulated during the 4QFY18 conference call. As a result, PNBHF has maintained an excess of liquidity of ~Rs 42bn of 2QFY19- end, which has resulted in concomitantly lower disbursements. This excess was ~Rs 30bn as of 1QFY19-end. NIM contracted 2 bps QoQ to 2.72% due to number of non-structural reasons: One of the reasons for NIM contraction (which is 29 bps YoY) is the policy of PNBHF to maintain excess liquidity as articulated above. Another aspect impact NIM negatively is rising leverage. Management indicated they would raise capital when leverage rises to 12-12.5x, which is slated to happen sometime in 4QFY20. Lastly, re-pricing of loan book yield upward on revision of interest rates plays out with a lag. About 70% of PNBHF is floating rate in nature. Asset quality remains best-in-class with a GNPA ratio of 0.45%: Importantly, gross NPAs for wholesale book, which is a systemic concern is nil for PNBHF. Provision coverage ratio including non-mandatory floating provisions remains very comforting at 177%. Management disclosed an exposure of Rs 2.8bn to stressed developer Supertech and said they were carrying adequate provisions on this exposure. There is no direct or indirect exposure to IL&FS Group. Valuation and outlook: We have revised our NII estimates by -3.5%/-6.2%/-5.6%, PPOP estimates by -4%/-6.7%/-6% and PAT estimates by -4.2%/-10.7%/-6.4% for FY19/FY20/FY21, respectively. We have retained Buy rating on PNBHF, revising our target price to Rs1,272 (from Rs1,312 earlier) and valuing the stock at 2.0x 1HFY21E P/BV. BUY Sector: NBFC CMP: Rs880 Target Price: Rs1,272 Upside: 45% Shivaji Thapliyal Research Analyst shivaji.thapliyal@nirmalbang.com +91-22-6273 8068 Key Data Current Shares O/S (mn) 167.5 Mkt Cap (Rsbn/US$bn) 149.9/2.1 52 Wk H / L (Rs) 1,444/694 Daily Vol. (3M NSE Avg.) 392,746 Price Performance (%) 1 M 6 M 1 Yr PNB Housing Finance 5.0 (35.9) (37.1) Nifty Index 2.1 (0.8) 0.7 Source: Bloomberg, Y/E March (Rsmn) 2QFY19 2QFY18 1QFY19 YoY (%) QoQ (%) Interest income 16,121 11,972 15,238 34.7 5.8 Interest expenses 12,289 8,348 10,998 47.2 11.7 Net interest income 3,832 3,624 4,241 5.8 (9.6) NIM (%) 2.7 3.0 2.7 (29bps) (2bps) Fee & other income 1,962 773 1,245 153.9 57.6 Operating income 5,794 4,396 5,486 31.8 5.6 Staff costs 809 297 506 172.6 59.9 Other operating expenses 613 584 787 5.0 (22.1) Total operating expenses 1,422 881 1,293 61.5 10.0 Cost- to- income (%) 24.5 20.0 23.6 451bps 98bps Operating profit 4,372 3,516 4,193 24.4 4.3 Provisions 647 756 440 (14.4) 47.0 PBT 3,725 2,760 3,753 35.0 (0.7) Tax 1,195 859 1,195 39.1 - -effective tax rate 32.1 31.1 31.8 95bps 24bps PAT 2,530 1,901 2,558 33.1 (1.1) Other comprehensive income 14-219 2 (106.2) 513.6 Total comprehensive income 2,543 1,681 2,560 51.3 (0.7) EPS (Rs) 15.1 11.4 15.3 32.8 (1.1) AUM 7,34,820 5,13,200 6,85,775 43.2 7.2
Comprehensive Conference Call Takeaways Asset Quality On their construction finance book, the management stated that they look at many parameters such as sales and collection velocity, developer rating, stage of construction, collateral underwriting etc to efficiently grant credit on this front. In more than 85 projects, developer own contribution is ~20%. The management stated that they have formed relationships with 173 real estate developers with 83% of real estate exposure in Tier 1 cities. They carry out continuous monitoring, including during postdisbursement stage, for early warning signals. Geographically, largest share comes from West at 43%, North is 29% and South is 28%. The management categorically stated that they do not have any corporate exposure to real estate groups such as Jaypee, Amrapali, Unitech, Parsvnath, SRH, Era. The management stated that they do not have any direct or indirect exposure to the IL&FS group. On the Supertech account, the management stated that they have issued 2 loans amounting to ~Rs2,800mn, of which, one is a completed project, while the other one is under construction in Gurgaon. Both the accounts are not an NPA and are adequately provided for and backed by an escrow mechanism. On the one completed project, current outstanding amount is Rs250mn. Earlier, it was Rs500mn. Outstanding amount on the under construction exposure stands at Rs2,300mn. In this exposure, there are two projects in which simultaneously construction is taking place. Sales velocity is 36%, which is as per their proposed covenant. Assigned loans outstanding stood at ~Rs66,900mn as of this quarter end. The management stated that there was no reported loss or damage to the collateral of the loan borrowers in Kerala. The management stated that due to their stringent norms for customer selection and credit monitoring, they registered a nil NPA on their wholesale book. The management stated that they are the sole lenders in most accounts. In only 3 accounts, they are participating in consortium. The management stated that the credit enhancement step from RBI is not of significant incremental value for them since they are already AAA- rated. The management stated that they had 2 NPAs in their wholesale book, which they managed to cure. Those 2 construction projects were sold. Including floating provisions, overall PCR stands at 177%. 5-6 accounts of the wholesale book are in Stage 1 and Stage 2. The management stated that the prepayments have come down since they have insulated their past portfolio. Including normal amortization and prepayment, the management expects an 18-19% run-off rate on their retail portfolio. The management stated that the largest exposure to an account in Delhi, NCR region is Rs3000-3500mn. The management stated that about 10% of the AUM will be securitized on a steady state basis. Loan and Business Growth The management stated that the growth rate has come down since the primary market has slowed down. Going forward, they believe they will be able to deliver a growth rate of 1.5-1.75x of the industry growth rate. 2 PNB Housing Finance
Margin, Liabilities and Liquidity The management stated that they had stressed the importance of excess liquidity from 4QFY18 conference call itself and now effectively stand at an excess liquidity of ~Rs42bn as of this quarter end. As of 1QFY19, the figure was around Rs30bn. Post September, PNBHF raised Rs60bn through CPs and USD200mn through ECBs. The management stated that the deposits applications have risen from ~3,500 in May to more than 7000 in September of this year. The management stated that the NII is lower than the average asset growth, as they were holding liquidity and not issuing credit. The second reason was higher leverage. The management stated that 70% of the total portfolio is linked to floating rate and there is a lag in reference rate change impact. Legacy high cost borrowings repricing lower have still provided a cushion from interest cost perspective. Income on assigned loans contributes 9bps to the 222bps spread. The management stated that the marginal cost of funds stood at 8.2-8.3% during the quarter. Capital The management still maintains their timeline to raise capital between October 2019 and March 2020. Currently, their leverage ratio is 9-9.5x, which when goes up to 12-12.5x, they will raise capital. Operating Expenses ESOP as per Ind AS resulted in a net impact of 5bps on the costs. Excluding the impact of non-structural HR costs, Opex to Average Total Assets will actually decline 2bps to 66bps. The management stated that their HR costs rose significantly this quarter due to salaries provided to DST employees brought under their fold via a subsidiary. Since, the subsidiary is owned 100%, fixed cost of DSTs cannot be amortized. This quarter witnessed promotions and bonuses as well. Overall, incremental HR cost were Rs180-190mn due to fixed salary costs of DSTs, Rs90mn due to ESOPs and Rs80mn due to increments and bonuses. Fee Income The management stated that the cross sell income was about one-third of the total fee income of Rs2,310mn. Cross-sell fees are upfronted while processing fees are amortized. 3 PNB Housing Finance
May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Institutional Equities Exhibit 1: Financial summary Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E Net interest income 11,297 17,194 21,187 29,403 40,686 Pre-provision profit 9,015 14,596 18,829 26,163 37,262 PAT 5,237 8,307 10,508 14,574 21,770 EPS (Rs) 31.6 49.9 63.1 87.5 118.8 BV (Rs) 336.7 378.6 434.4 514.7 757.2 P/E (x) 27.8 17.6 13.9 10.1 7.4 P/BV (x) 2.6 2.3 2.0 1.7 1.2 Gross NPAs (%) 0.2 0.3 0.7 0.7 0.7 Net NPAs (%) 0.2 0.3 0.3 0.1 0.0 RoA (%) 1.4 1.6 1.4 1.6 1.8 RoE (%) 13.6 14.0 15.5 18.4 19.4 Exhibit 2: Actual performance versus our estimates (Rsmn) 2QFY19 2QFY18 1QFY19 YoY (%) QoQ (%) 2QFY19E Devi. (%) Net interest income 3,832 3,624 4,241 5.8 (9.6) 5,034 (23.9) Pre-provision profit 4,372 3,516 4,193 24.4 4.3 4,662 (6.2) PAT 2,530 1,901 2,558 33.1 (1.1) 2,501 1.1 Exhibit 3: Change in our estimates Revised estimate Earlier estimate % Revision FY19E FY20E FY21E FY19E FY20E FY21E FY19E FY20E FY21E Net interest income (Rsmn) 21,187 29,403 40,686 21,963 31,334 43,120 (3.5) (6.2) (5.6) NIM (%) 3.1 3.3 3.5 3.2 3.5 3.6 (9bps) (16 bps) (15 bps) Operating profit (Rsmn) 18,829 26,163 37,262 19,612 28,044 39,644 (4.0) (6.7) (6.0) Profit after tax (Rsmn) 10,508 14,574 21,770 10,963 16,324 23,262 (4.2) (10.7) (6.4) Exhibit 4: One-year forward P/ABV (x) 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 P/Adj. BVPS Mean +1 SD -1 SD +2 SD -2 SD 4 PNB Housing Finance
Financials Exhibit 5: Income statement Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E Interest income 36,401 50,824 71,318 94,985 1,25,487 Interest expenses 25,104 33,630 50,131 65,582 84,801 Net interest income 11,297 17,194 21,187 29,403 40,686 Non-interest income 2,678 4,346 6,199 8,059 11,388 Net revenues 13,975 21,540 27,386 37,462 52,074 Operating expenses 4,959 6,944 8,557 11,299 14,812 -Employee expenses 1,013 1,365 1,828 2,388 3,076 -Other expenses 3,947 5,579 6,729 8,911 11,736 Operating profit 9,015 14,596 18,829 26,163 37,262 Provisions 975 1,805 2,410 3,390 3,246 PBT 8,040 12,791 16,418 22,772 34,016 Tax 2,803 4,484 5,911 8,198 12,246 PAT 5,237 8,307 10,508 14,574 21,770 Exhibit 7: Balance sheet Y/E March (Rsmn) FY17 FY18 FY19E FY20E FY21E Share capital 1,656 1,666 1,666 1,666 1,832 Reserves & surplus 54,117 61,402 70,706 84,077 1,36,924 Net worth 55,773 63,068 72,372 85,743 1,38,756 Borrowings 3,54,971 5,40,722 6,97,089 9,02,471 11,65,835 Other liability & provisions 18,851 34,226 50,876 70,338 93,388 Total liabilities 4,29,596 6,38,016 8,20,337 10,58,552 13,97,979 Fixed assets 604 857 865 874 882 Investments 9,614 11,617 14,521 18,151 22,688 Loans 3,85,713 5,70,957 7,74,889 10,07,356 13,39,783 Cash 1,515 28,169 2,325 3,022 4,019 Other assets 32,150 26,417 27,738 29,149 30,606 Total assets 4,29,596 6,38,016 8,20,337 10,58,552 13,97,979 Exhibit 6: Key ratios Y/E March FY17 FY18 FY19E FY20E FY21E Growth (%) Net interest income 48.9 52.2 23.2 38.8 38.4 Operating profit 54.4 61.9 29.0 39.0 42.4 Profit after tax 60.4 58.6 26.5 38.7 49.4 Business (%) Advances growth 36.8 48.0 35.7 30.0 33.0 Spread (%) Yield on loans 10.6 10.4 10.4 10.5 10.5 Cost of borrowings 8.2 7.5 8.1 8.2 8.2 Spread 2.5 2.9 2.3 2.3 2.3 NIM 3.3 3.5 3.1 3.3 3.5 Operational efficiency (%) Cost- to-income 35.5 32.2 31.2 30.2 28.4 Cost-to-AUM 1.5 1.5 1.3 1.3 1.3 Productivity (Rsmn) Loan per branch 6,122.4 6,797.1 7,400.0 8,100.0 9,200.0 Loan per employee 386.1 442.6 493.3 540.0 613.3 Employee per branch 15.9 15.4 15.0 15.0 15.0 CRAR (%) Tier I 16.5 12.8 11.1 9.8 11.9 Tier II 5.1 3.9 3.1 2.5 3.0 Total 21.6 16.7 14.3 12.3 14.9 Asset quality (%) Gross NPAs 0.2 0.3 0.7 0.7 0.7 Net NPAs 0.2 0.3 0.3 0.1 - Specific provision coverage 31.2 22.7 52.2 88.3 101.0 Credit cost (excluding std. asset) 0.2 0.3 0.2 0.3 0.1 Credit cost (including std. asset) 0.3 0.4 0.4 0.4 0.3 Return ratios (%) RoE 13.6 14.0 15.5 18.4 19.4 RoA 1.4 1.6 1.4 1.6 1.8 Per share (%) EPS 31.6 49.9 63.1 87.5 118.8 BV 336.7 378.6 434.4 514.7 757.2 ABV 333.2 369.9 418.9 509.7 757.7 Valuation (x) P/E 27.8 17.6 13.9 10.1 7.4 P/BV 2.6 2.3 2.0 1.7 1.2 P/ABV 2.6 2.4 2.1 1.7 1.2 5 PNB Housing Finance
Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Institutional Equities Rating track Date Rating Market price (Rs) Target price (Rs) 26 March 2018 Buy 1,139 1,410 4 May 2018 Buy 1,414 1,634 10 August 2018 Buy 1,305 1,673 9 October 2018 Buy 890 1,312 6 November 2018 Buy 880 1,272 Rating track graph 1,500 1,400 1,300 1,200 1,100 1,000 900 800 700 600 Not Covered Covered 6 PNB Housing Finance
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